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Real Estate Note Investing

Are you a wholesaler, a rehabber, a landlord, or even a turnkey investor? This book will help you turn your focus to the “other side” of real estate investing, allowing you to make money without tenants, toilets, and termites.

@Craig Montesano - one question: are all the utilities paid by the tenants, or some by the landlord? That's a big factor, especially somewhere with cold winters like PA, if the heat were paid by the landlord. Also, the 50% rule that David mentions above assumes that the tenant pays all utilities. You have to add more to the expenses if the landlord pays utilities.
-Harry

Think the sellers are looking for a quick sale....may be able to get for around $85K.

Yeah, I know $395/month is pretty cheap and could attract some riff raff. 3 out of 4 of the units are currently rented. When tunover occurs I am think of bumping rent to $425ish. That seems like the going rate for 1 bedroom units in that area

Originally posted by @Craig Montesano :Thanks Harry....I was able to run my numbers fine on my single family homes, but this one is throwing me for a loop. At first I thought it was a good deal, then I didnt. confused???

Your numbers helped alot.

I think the problem is I was concentrating on a 15 year fixed at 3.5% and with Prin., int., taxes, ins. I was coming up with a $880 (roughly monthly payment)

I need to look at a 30 year. Looks like a better deal going that route. Does your 399 mortgage inclue taxes and ins?

ALso, could you recommend a good mortgage calculater.

Hey Craig, the 399 mortgage payment I came up with doesn't include taxes and insurance. That went into the 790 I put for expenses.

I just ran it with a 15 year loan and 3.5% interest, and the P&I part of the mortgage goes up to 563, cash flow down to 227, for 9.3% cash on cash, but 23.2% total ROI when you factor the mortgage pay-down.

My opinion is that 15 year mortgages don't make a whole lot of sense for investing in RE. The difference in interest is usually only around 0.5%, but in return you're agreeing to make this extra principle payment for 15 years. That extra principal payment would make a much better return if it was used towards the down payment on the next property. And there's nothing stopping a person from reaching a point where they have enough properties, and then voluntarily paying down the principal on the mortgages. That just seems like a lot of flexibility (and potential return) to give up for about an 0.5% difference in interest rate.

Regarding mortgage calculators. I'm not sure if we're supposed to post outside links here, but if you google "mortgage calculator" or "amortization calculator" or "amortization schedule" it will come up with a bunch of them.
Do you have excel or open office? If so, you can you can use the PMT function to figure it out too.

For rents around $500, there is a quick and dirty rule of thumb called the "2% rule" - rents should be 2% of acquisition costs. That would make total acquisition costs (including repairs and rehab) a max of $79K. Now for rents below $500, a higher percentage is more appropriate, since the $100 cash flow per door is a bigger chunk of rent. And those lower rent tenants can be more management intensive ...

As much as I dont want to, I think I will need to walk away from this one.

There are a few duplexes in the area that might be more profitable.

On the 15 year mortgage note...I did my 2 single family homes at 15 years which had a lower rate. I wish Id done the 30 year....Id have twice the cash flow. oh well I guess there has to be some kind of learning curve and in the long run I will save some dough

Lots of Real Estate Investors will tell you it's about leveraging the money you have or get lent. Many people get hard money loans at 12-15%, rehab a house, and then either refi the house at a higher appraised value to pay off the hard money loan or sell it quickly to pay back the loan in full. If the difference between 15/30 year loans was 3.5% and 8% I can bet more might do a 15 year loan but a half percent is negligible when you can leverage that half percent elsewhere for way more ROI.

@Ryan Halverson - what "taxes" does that spreadsheet refer to? If those are supposed to be the property taxes, then your sheet wouldn't do the right thing in many areas. For example, in my area, taxes are based on the assessor's valuation of the property (and not on the actual sales price as might happen elsewhere), multiplied by a millage rate; essentially, the taxes are fixed except that they raise the millage :) Might be something for you to consider as you evolve that spreadsheet.

@Steve Babiak I did a little research before making it, nothing comprehensive. I understand it is generally 40% of assessors value multiplied by the millage rate? Either way 3500/year for a 95k property is pretty high. Maybe the assessor has your property appraised from a long time ago?

@Ryan Halverson - the assessor's value is not necessarily "old"; they will increase for any improvements where a permit was pulled and that improvement changed their valuation. Just saying that any fixed percentage being calculated will likely be inaccurate when compared to the actuals from the assessor.

One way to approach the real estate tax cost (as apposed to personal property tax on furniture & equipment) is to use the approach that assessors often use when they value income producing properties. Don't have a expense item for property taxes (that's what the assessor is estimating so he doesn't take property taxes as an operating expense. BUT add it to the capitalization (CAP) rate. For example, if investors are looking for a return of 10% and recent sales to the net operating income (NOI) for those same sales indicate them same cap rate (of course make sure the NOI does not include real estate taxes as an expense) and real estate taxes in the subject property's location represent 2% of market value the resulting capitalization rate for comparison purposes would be 12%. This also help when comparing competing properties for sale or as comps from various taxing districts, even region wide.